Mexico: Toughening competition law

Author: | Published: 1 Oct 2010
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Article 28 of the Mexican Constitution prohibits monopolies and monopolistic practices. In 1993 this constitutional mandate was implemented by the Federal Law of Economic Competition (LFCE). This provides regulation on merger control, absolute monopolistic practices and relative monopolistic practices.

The LFCE defines four specific types of conduct that constitute absolute monopolistic practices, all of them consisting of collusive agreements (price fixing, restriction of output, market segmentation and bid rigging) that are illegal per se.

Additionally, the LFCE defines eleven specific types of conduct that are considered relative monopolistic practices, referred to as unilateral exclusionary or predatory conducts that may be deemed illegal if: (i) the conduct is carried out by an economic agent with substantial market power in the relevant market (substantial market power is defined as an economic agent's ability to unilaterally fix prices or to substantially restrict supply in the relevant market, without competing agents being actually or potentially capable of counteracting such ability) and (ii) the conduct's purpose or effect is to unduly displace other economic agents from the market; substantially preclude their access to the market; or create exclusive advantages in favour of one or several persons. Efficiency gains favouring consumer welfare may be alleged to sustain the legality of a relative monopolistic practice.

The LFCE has been amended once, in June 2006. In April 2010, President Felipe Calderon sent a bill to the Mexican Congress to amend it again, and to amend the Criminal Federal Code, in order to strengthen competition policy and law enforcement. The House of Representatives approved the bill with some minor changes and additions. It will probably be discussed and approved by the Senate in the current legislative period (September-December).

In general terms, the proposed amendments are aimed at increasing sanctions for illegal conduct. They criminalise absolute monopolistic practices, and strengthen the Federal Competition Commission's (CFC) powers to investigate and punish such conduct.

According to the bill, the proposed core lines of action are: to facilitate compliance of competition legislation and to focus CFC's attention and resources on relevant cases; to improve the effectiveness, efficiency and transparency of CFC's operations; and to achieve a more efficient competition policy through the adoption of effective instruments to investigate and sanction anticompetitive practices.

The most relevant amendments are discussed below, as well as some proposals that we have presented before the Mexican Congress.

Joint substantial market power

The bill proposes to incorporate the concept of joint substantial market power into the LFCE. Accordingly, the CFC would be empowered to investigate and sanction relative monopolistic practices performed by two or more legally and economically independent undertakings.

In order to justify this amendment, the bill states that some other jurisdictions have incorporated the concept of joint market power in their respective laws and, thus, to do it in Mexico would be consistent with international practice.

It is worth mentioning that the House of Representatives modified this proposed amendment in order to add some elements in addition to those related to the unilateral substantial market power (market shares, entry barriers, access to inputs, among others), specifically: the existence of similar and sustained behavior, implicit or explicit, of those undertakings under investigation; the existence of entry barriers to the group of undertakings performing the conduct; and the existence of an actual or potential harm to the competition process.

In our opinion, considering the specific circumstances of Mexican markets, this amendment might not represent a great step forward in competition policy and seems to be inappropriate.

On the one hand, it is well known that the most important cause of lack of competition in Mexico is the existence of many important markets where a single economic agent has a dominant position (eg telecommunications, cement, retail, etc.); so, there are just a couple of markets where the incorporation of the joint substantial market power concept would help to solve competition problems. On the other hand, the amendment would cause a high degree of uncertainty for those undertakings that do not have a dominant position and perform certain activities which might be categorised as relative monopolistic practices but, in fact, are an answer to a natural inertia of the markets or follow the conduct of the dominant agent and, furthermore, are not an abuse of any power.

So, considering the low impact in solving competition problems and the uncertainty generated by the incorporation of the concept of joint substantial market power into the LFCE, it would be convenient that the Senate eliminates this amendment or, at least, modifies the bill in order to incorporate as an essential requirement for the imposition of a sanction in case of joint substantial market power, the existence of an agreement between the accused undertakings to act in a coordinated manner.

Precautionary measures

Currently, the LFCE empowers the CFC to order a firm to cease an illegal practice or concentration when a final resolution is issued in the corresponding procedure.

The bill proposes to empower the CFC to order the temporary suspension of the investigated conduct or concentration, at any time after the issuance of the official communication of probable liability. This could happen two years before the issuance of the final resolution saying that an illegal conduct took or did not took place.

Even though these kinds of measures are used in several countries and even in Mexico in other fields (eg judicial procedures), in our opinion, this amendment to the LFCE might raise constitutional issues since, unlike the measures used in other fields, precautionary measures introduced in the bill are not aimed at preserving the matter of the case, but to change the status quo.

From the reasons given above, it seems that the CFC is not empowered to order an economic agent not to perform any conduct, without proving the aforementioned assumptions. Otherwise the constitutional right to perform any legal activity can be violated.

Sanctions

The bill proposes substantially increasing fines for companies performing monopolistic practices. Under the reforms, companies found guilty of illegal conduct would face fines as follows: (i) in the case of absolute monopolistic practices, up to 10% of their annual turnover; and (ii) in the case of relative monopolistic practices and illegal concentrations, up to 8% of their annual turnover. Currently, the highest fine that CFC can apply is $7 million for an absolute monopolistic practice.

Additionally, the bill introduces criminal penalties (three to ten years) for executives who lead their companies into absolute monopolistic practices. In relation to the above, the CFC would be empowered to file criminal complaints for the perpetration of felonies against free competition and to ask the Attorney's General Office to dismiss the prosecution of said felonies.

The increase of fines is certainly adequate, since it follows international best standards and most other competition authorities around the world apply similar amounts.

However, in relation to the criminalisation of absolute monopolistic practices, although the amendments could inhibit the implementation of such practices with some effectiveness, it is also regarded as necessary, in our opinion, to limit the faculties of the CFC in this matter, since, in terms of the amendment, these faculties are too broad: they give the authority a disproportionate power by leaving to its discretion both the complaint and the dismissal of prosecution for felonies in any economic competition matter.

Home visits

When the LFCE was last amended in June 2006, a faculty to file a petition before the Federal Courts in order for them to perform home visits was granted to the CFC. The visits may only be performed to obtain data or documents that had previously been requested in writing by the CFC.

In August 2006, the General Prosecutor filed an unconstitutionality motion before the Supreme Court regarding said faculty, among other constitutional issues of the amendment. The motion was resolved in May 2007. The Supreme Court stated that there was no need for the CFC to file a petition in order to perform home visits and that this faculty could be performed by itself as an administrative authority empowered to enforce the LFCE.

It is in this context that the bill empowers the CFC to perform home visits. However, even when the constitutionality of this visit itself is hardly to be challenged, some new constitutional issues may arise since substantial changes for this faculty are being introduced with the amendment. The terms in which the home visit are to be regulated under the amendments make this faculty look more like a criminal inspection order – that only a judge is empowered to issue- than an administrative task.

Dismissal of investigations

The decree project introduces the possibility for the CFC to dismiss an investigation of relative monopolistic practices or illegal concentrations under a non-litigious procedure (i) without making any statement about the responsibility of the economic agent subject to said investigation, and/or (ii) depending on particularities of the case, applying up to 50% of the corresponding fine (under the LFCE currently in force, under the aforementioned non-litigious procedure, the CFC is empowered to apply a minimum fine of approximately $4.00 but it does not expressly state that the responsibility issue may be unresolved).

In order for this non-litigious procedure to take place, the investigated economic agent must agree to suspend, withdraw, correct, or not perform the illegal relative monopolistic practice or illegal concentration.

This proposal is aimed at speeding up the solution of competition problems, minimising the use of CFC's resources, and avoiding litigious procedures and unnecessary fines. However, in our opinion, the risk of being fined that is introduced with the amendment makes it inadvisable to file a petition of this kind, especially for those economic agents not convinced of their responsibility. In this regard, it is better to leave this non-litigious procedure currently in force or amend it only in the part that clarifies that no responsibility statement has to be resolved.

Transparency

On this topic the amendment proposes to incorporate in the LFCE the obligation for the CFC to issue its criteria on several matters in order to provide greater certainty to the economic agents subject to the application of the law. It must perform a public evidentiary hearing for this purpose.

The incorporation of this obligation will certainly guarantee more transparency on CFC's actions. However, considering that transparency is a fundamental vehicle for ensuring that the actions of the CFC are objective and impartial, we believe that the following modifications should also be included: elimination of the prohibition against parties accessing the investigation file; disclosure of the name of the parties under investigation in the official document in which the CFC announces the beginning of an investigation procedure; and publication of the name of the economic agents filing a concentration, in addition to publication of the documents about the transaction and its effects while safeguarding confidential information.

About the author

Mr Brito Anderson obtained his law degree from the Escuela Libre de Derecho in Mexico City. He started his practice of law in the public sector, where he was appointed as Legislative Projects Chief of Department (1988), Under-Director of Legal Analysis (1989), Litigation Director at the Ministry of Tourism, as well as Counseling Legal Director at the Ministry of Agriculture and Water Resources (1990-1992). He started his private practice in 1993, in the areas of administrative law and litigation, especially constitutional proceedings. Furthermore, he was external consultant of several governmental entities, such as the Federal Competition Commission, where he participated in complex antitrust litigation cases, as well as in the drafting of the regulations of the Economic Competition Federal Law. He was also consultant to the Economic Deregulation Unit and the Regulatory Improvement Federal Commission, where he headed all outside legal counseling of the economic deregulation and regulatory improvement federal programs for five years. In 1996, he co-founded Valdes Abascal y Brito Anderson S. C., where he specializes in antitrust, constitutional trials (amparo), administrative, civil and commercial litigation, legal amendments and regulatory affairs. He has authored several publications and participated as speaker in numerous conferences and seminars. He was professor of economic competition law in the module of corporate law at the Universidad Iberoamericana, as well as at the Universidad

Contact information

Rafael M. Brito Anderson
Valdes Abascal y Brito Anderson S. C.

Corporativo Arcos Bosques
Paseo de Tamarindos 400-B piso 18
Bosques de las Lomas
05120 México, D.F.

Tel: +52(55) 5959 15 90
Fax: +52(55) 5950 1599
Email: rafael.brito@vb.com.mx
Web: www.vb.com.mx

About the author

Mr Calderon Villegas graduated in law from Universidad Panamericana in 2005. In 2004 he incorporated to Valdes Abascal y Brito Anderson S. C.  He is now Senior Associate of the firm, where he has had an intense practice in the areas of antitrust, constitutional trials (amparo) and administrative litigation. He is professor of economic competition law in the Universidad Panamericana.

Contact information

Gerardo Calderón Villegas
Valdes Abascal y Brito Anderson S. C.

Corporativo Arcos Bosques
Paseo de Tamarindos 400-B piso 18
Bosques de las Lomas
05120 México, D.F.

Tel: +52(55) 5959 15 84
Fax: +52(55) 5950 1599
Email: gerardo.calderon@vb.com.mx
Web: www.vb.com.mx